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Willingness to Pay for Nursing Home Quality

Private long-term care in the U.S. is extremely expensive. The average yearly cost in a nursing home in 2012 was $78,110. While the federal Medicaid program pays for a substantial portion of all long-term services, this benefit is only available for poor households. Putting all these elements together, standard economic models with forward-looking and risk-averse individuals would predict high levels of take-ups in private insurance against these risks. However, in 2012 less than 6% of long-term care expenditures were paid for by private insurance policies. In this paper, we study how preferences for the quality of nursing homes could drive insurance take-ups and we estimate the willingness to pay for private (non-Medicaid) nursing homes. We designed an experimental module for the 2012 wave of the Health and Retirement Study, which aimed to elicit those preferences. In the module, respondents are asked to rate four different insurance policies paying the nursing home costs for the remaining years of life, but varying in the monthly premium and in two levels of quality, where the lower quality type is aimed to resemble the types of Nursing Homes covered by Medicaid. Our findings suggest that individuals would be willing to accept an increase of about 50% in the monthly premium to avoid long-term care provided by Medicaid. Our estimates are confirmed when we repeat the experiment in the internet-based RAND American Life Panel Survey.